Restricting relief for landlord’s finance costs

From 6 April 2017 individual landlords receiving rental income from residential property will suffer restrictions on the amount of tax deductions they can obtain for mortgage interest and other finance costs.

Landlords will not be able to deduct all their finance costs from rental income in calculating their taxable profit. They will only be entitled to relief at the basic rate (currently 20%).

The measure will be introduced over time, as follows:

  • in 2017-18, deductions from rent will reduce to 75% of finance costs (i.e. 75% will be deductible in full as now), with the remaining 25% deductible at the 20% basic rate only;
  • in 2018-19, deductions from rent will reduce to 50% of finance costs (i.e. 50% will be deductible in full as now), with the remaining 50% deductible at the 20% basic rate only;
  • in 2019-20, deductions from rent will reduce to 25% of finance costs (i.e. 25% will be deductible in full as now), with the remaining 75% deductible at the 20% basic rate only; and
  • in 2020-21, all finance costs will be deductible at the 20% basic rate only.

While not yet clear, it appears that losses (excess finance costs allowable under the above rules) will be restricted in use to being carried forward against future profit from the rental business only. The Finance Bill will need to be looked at for the detail.

Corporate landlords will not be affected. It applies to individuals only.

Commercial property and furnished holiday lets are unaffected.

The measure is introduced in the name of “fairness” in the tax system, though one wonders how taxing individuals on profits they have not actually made is fair. In practice individuals will have to fund the tax out of e.g. employment income that has already been taxed.

Estate agents warn that the measure will increase rents. Affordable housing campaigners welcome the announcement, anticipating increased stock on the market and reduced competition from buy-to-let landlords. Time will tell.

Changes to wear and tear allowance

From April 2016 the wear and tear allowance (i.e. an annual deduction of 10% of net rents for wear and tear of furnished residential property) will be abolished and replaced with a new relief allowing landlords to deduct the actual cost of replacing furnishings. Details are pending. A consultation is to be published before summer 2016.

Annual investment allowance limit to be £200,000

The annual investment allowance is a form of capital allowance (broadly giving businesses a 100% upfront allowance on qualifying expenditure within an annual limit). The limit was due to revert from the current temporary limit of £500,000 to £25,000 from 1 January 2016. It will now drop to an increased permanent limit of £200,000.